Ahead of the start of third-quarter earnings season for forest product companies later this week, Raymond James analyst Daryl Swetlishoff is “taking an increasingly conservative stance on the sector due to assumed heightened recessionary headwinds in the U.S. housing market.”
In a research report released Monday, he reduced his price assumptions for Western spruce-pine-fir and oriented strand board due, in large part, to the declining fortunes of the U.S. housing industry. That led him to cut his forecast for the both the quarter and the next fiscal year.
“When combined with higher assumed energy, logging and transportation inflation (partially offset by FX) our 2023 estimates fall by 25 per cent on average prompting us to reduce target prices across the board,” he said.
“Lumber prices continued to fall for the second successive quarter, with earnings forecast to drop a whopping 82 per cent on average relative to 2Q22. Despite recessionary and inflationary headwinds coinciding, we are sitting on either side of consensus estimates as solid average commodity prices (by historic standards) coupled with US$ currency strength are offset by cash cost inflation across the board. West Fraser is first out the gate Wednesday after market, and we are 5 per cent above consensus – a function of the company’s geographic and production diversification. We also forecast a slight Beat for Conifex, while we expect Canfor to be impacted by the company’s higher BC exposure and weaker Euro lumber demand. We also forecast a miss for Western Forest in the face of challenging BC Coast cost dynamics with specialty end use markets impacted by the weakening Japanese Yen performance. On the pulp side, we expect Mercer to record another impressive quarter as the company’s pulp business remains unexposed to fibre-related supply shortages, while Canfor pulp is poised to miss consensus in light of material production disruptions and softening China pulp pricing.”
Mr. Swetlishoff made a pair of rating changes:
* Western Forest Products Inc. to “outperform” from “strong buy” with a $1.85 target, down from $3.25 and below the $2.21 average.
* West Fraser Timber Co. Ltd. to “outperform” from “strong buy” with a $150 target, down from $190. The average on the Street is $148.28.
His target changes are:
* Canfor Corp. ( “strong buy”) to $35 from $55. Average: $37.17.
* Canfor Pulp Products Inc. ( “outperform”) to $6.50 from $7.50. Average: $6.90.
* Conifex Timber Inc. ( “outperform”) to $2.30 from $3.25. Average: $2.33.
* Interfor Corp. ( “strong buy”) to $46 from $60. Average: $42.17.
* Mercer International Inc. (MERC-Q, “outperform”) to US$22 from US$24. Average: US$18.90.
“Now for the good news. Despite assuming an outlook consistent with a housing and economic recession our estimates still suggest very attractive valuations 2.5 times 2023 EV/EBITDA with an average 65-per-cent upside to target,” said Mr. Swetlishoff. “While building materials end users are currently very cautious – unwilling to buy beyond immediate needs, we expect this (esp. when coupled with potential logistical challenges) could support a typical seasonal commodity rally. Aside valuation and the seasonal trade we also point out that cash lumber prices are holding 10 per cent below our estimate of 4Q22 BC variable costs and note that we regard expanded curtailment potential as a catalyst. Earnings season kicks off this week and our estimates suggest potential for some beats and misses; we would take advantage of potential volatility to add to positions.”